Networking Sector: Changing Landscape

Early in the month, Cisco said that the networking industry is showing signs of stabilizing despite an 18% slump in sales. 3Com too has been showing signs of pulling off a turnaround. Nortel, however, filed for bankruptcy earlier this year. And Brocade is likely an acquisition target. Let’s now analyze the performance of the remaining networking networking players of which F5 is the strongest, and Alcatel-Lucent the weakest.

On April 22, F5 Networks, Inc. (NASDAQ:FFIV), a leader in the niche of application delivery networking with annual revenue of $650 million, reported its second quarter results. Q2 revenue was down 7% y-o-y and 3% q-o-q to $154.1 million. Net income was up 7% to $19 million. Q1 analysis is available here.

Gross margin was 76.3%, down from 78.2% last quarter. The company generated $39.2 million in cash flow from operations, above its $35 million target. It ended the quarter with $499 million in cash and investments and bught back shares worth $27.4 million.

By segment, revenue from the core application delivery controller business was $143.5 million. ARX revenue was $4.5 million and FirePass revenue was $6.1 million.

F5 said it had strong bookings in January and March but very weak bookings in February. The quarter started on a good note and for the third quarter, the company has set a revenue target in the range of $148 to $157 million. It expects gross margin in the 77% to 78% range, GAAP EPS between $0.22 and $0.25 per diluted share, and non-GAAP EPS between $0.35 and $0.38 per diluted share.

Last month, F5 announced new machine-to-machine capabilities for its BIG-IP acceleration devices. It has recently announced software releases for the BIG-IP and ARX file virtualization systems that save on costs.

The stock is currently trading around $26 with market cap of about $2 billion. It hit a 52-week high of $29.53 on May 7.

As IBM, HP, and now possibly Oracle starts to consider entering the networking sector, F5, Brocade and 3Com remain the three most attractive and affordable acquisition targets as the mega tech conglomerate build-up continues.

On May 5, Alcatel-Lucent (NYSE:ALU), a telecommunications equipment company with annual revenue of €16.98 billion, reported its first quarter results. Revenue was down 6.9% y-o-y and 27.4% q-o-q to €3.598 billion. Net loss was €402 million ($537.5 million) or €0.18 per share (loss of $0.24 per ADS) compared to a loss of €181 million last year. Adjusted gross margin was 31.5%, down from 36.2% last year and 33.3% last quarter, mainly driven by volumes and product/geographic mix.

Net debt almost doubled from €452 million last quarter to €841 million, mainly due to the adjusted operating loss of €254 million. The company ended the quarter with cash and marketable securities of €3.34 billion. It repaid debt of €777 million in the quarter, and the €1.6 billion sale of its 20.8% stake in Thales is expected to be completed in the second quarter.

By segment, Carrier revenues were down 29% y-o-y and 14% q-o-q to €2.219 billion. Applications Software revenues were €255 million, down 22.5% y-o-y and up 13.3% q-o-q. Enterprise revenues were €245 million, down 23% y-o-y and 17.5% q-o-q. Services revenue was €797 million, down 23% y-o-y and up 20.6% q-o-q.

Alcatel-Lucent said it cut the jobs of 290 managers and 770 contractors this year. Last quarter, it announced plans to cut 1,000 manager and 5,000 contractor jobs.

In my most recent post on the company, I said that Alcatel-Lucent needed a crisp strategic plan. It is now sharpening its portfolio around its “high leverage network” strategy. It will focus on optical, Internet protocol, broadband and applications areas. It recently released a new Application-Assured Business VPN offering that can be delivered using a cloud-based model, doing away with traditional heavy upfront investment in hardware.

While global spending on wireless infrastructure is expected to decline, as per iSuppli the Chinese market is expected to increase 13.2% to $6.2 billion this year, and the competition is fierce in this market. Chinese company Huawei recently overtook Alcatel-Lucent to become the No. 1 global optical networking market leader in Q109. Last month, however, Alcatel-Lucent also signed two deals worth $1.7 billion in China, beating Ericsson, Nokia-Siemens and Huawei.

Alcatel-Lucent continues to expect full-year 2009 adjusted operating income to be break even. It sees communications equipment industry demand down 8-12% for the year. According to the U.S. Bureau of Economic Analysis, total U.S. sales of communications equipment fell 16% to $88 billion in Q109 from $106 billion in Q308.

The stock is currently trading around $2 with a market cap of about $5 billlion. It hit a 52-week low of $1.16 on March 3. Alcatel-Lucent remains perched in a state of precarious balance, navigating between recovery and extinction in this nightmare of a market in which the survival of the fittest concept has taken on a whole new dimension.

This segment is a part in the series : Networking Sector